Conceding Correctly - or How to Give Away Less, and Make Customers Feel
Good About It
When sales are slower than desired, the common strategy is one of attempting to create value and urgency by offering large price reductions, most often on existing inventory. This usually takes the form of blaring announcements; Save $25,000 or Reduced $40,000. Yet, one must ask if this approach, given a willingness to accept $25,000 or $40,000 less than the original price, is the best - i.e. will it result in the most sales, and will it minimize the amount of additional concessions requested by potential buyers?
Pondering this issue leads to three questions:
- Who is happier - a person who receives a $100 sweater for their birthday, or one who receives a $50 sweater, a $25 tie, and a $25 Gift certificate to their favorite store?
I strongly believe that the average multiple gift receiver feels more satiated than his single gift of equal total value compatriot. This occurs for several reasons, but fundamentally most people would rather feel good (or in the case of an aggressive buyer “be a winner”) three times instead of once. As military strategists are fond of saying -“Quantity has a quality all its own".
- Who will ask for more - someone who sees you give them a large discount ($50,000) or someone who receives four smaller ($12,500) discounts?
How people feel and act, is to a large degree determined by the environment in which they operate, and the signals they receive. Saying you have $50,000 to give away is the perfect invitation to ask for $50,000 more, or at the least an extra $25,000. Establishing a pattern of gradually decreasing concessions sets the stage for “one more” of a similar or slightly lower amount. Remember the call to action of one of the all time great marketers, Ronco’s Ron Popeil, (The Amazing Vegematic, Popeil Pocket Fisherman, etc.) “But wait-there’s more”.
- How do we create a dollar’s worth of value for the customer, at a cost of less than a dollar - i.e. how do we leverage the perceived value to the customer of any concession we make?
The difference between the cost and perceived value of a feature or benefit is one of the best ways to leverage concessions. If the price printed on a book is $12.95, and I give it to you for free, that is a $12.95 concession in the mind of the buyer, whether the book cost me $2.00 or $6.00 to print. The value to the customer of this concession, however, may range from zero (what do I want with a book about widgets), to $12.95 (of course it’s worth that - it’s printed right on the cover) to $1000 (I bought a book from the same author last year and I learned two things that helped my business make a lot of money - I must read his new ideas). If you can concede the right features and benefits you will be the beneficiary of the difference between the customer’s perceived value of these features and your actual costs.
So how should a home builder trying to move inventory utilize these ideas? Here is an example:
You have a speculative home originally priced at $489,900 which you previously reduced to $479,900. You would be willing to sell it for $439,900 before commission, which would get you out with a gross profit of $41,000, stop the interest meter, free your $40,000 equity, and allow you to start a new, smaller home on a less expensive lot, and take advantage of a market demand for less expensive homes.
I might make my value statement as follows:
Originally Priced at $489,900
- Reduced to $464,900 - Save $25,000
- Special Financing arranged through Builder - 3/4% below Market - Save $19,279 in monthly payments*
- Annual Taxes in the premier Sherbet County School System - Prepaid by Seller for two years - Save $8,400
- Free oversized 14’ by 10’ cedar and pressure treated deck with stairs to grade and built-in seating — a $6,350 value
TOTAL YOU SAVE — $59,029 *Note - Based on first seven years savings. Loan Amount of $371,920 (80% financing) and a market rate of 5.25%, special rate of 4.50%.
Here the total claimed (and hopefully perceived) concession is $59,029 instead of the $50,000 offered by a price reduction from $489,900 to $439,900. Additionally, the builder does not spend the full $59,029 due to the difference between the cost and the value of the special financing and the deck offers. We also enjoy the benefits of a “packaging of concessions” instead of just a single price reduction, and hopefully we have created a situation with a reduced probability of requiring further concessions due to the pattern of decreasing incentives, with the final one being worth $6,350 instead of a single $50,000 price reduction.
